Santa Rosa commercial real estate ‘definitely on the upswing'

The Santa Rosa industrial market is the strongest we have seen in many years and currently is the tightest market of all property types. This is a result of years of low rents that did not justify new construction. We are seeing more companies considering build to suit opportunities as the inventory of existing buildings do not meet the needs of tenants.

The industrial vacancy rate in Santa Rosa was 7.6 percent at the end of the 4th Quarter 2015 which was 2 percent lower than the 9.6 percent vacancy rate at the end of 2014. The low inventory is leading to multiple lease offers on good quality industrial spaces. This demand is also pushing rents up by 15 percent-20 percent in some instances. Rental rates are currently ranging from $.70-$.90 per square foot gross.

We anticipate the vacancy rate to continue to drop over 2016. With rents increasing we are starting to get to a point where speculative construction can make sense. Rents for speculative construction need to be minimally in the $.85-$.95 per square foot level on a NNN basis. While slightly higher than current rents, some tenants are making the decision to pay more for the ability to keep their companies in the county. We estimate that we need upwards of 4,000,000 square feet of additional industrial space to keep up with demand and a 7 percent vacancy rate into the year 2020.

The Santa Rosa office market is showing significant signs of strengthening as the first quarter comes to a close. Tenant demand and tours of properties are increasing especially for tenants in the 3,000-10,000-square-foot range.

The vacancy rate for Santa Rosa office space stood at 15.6 percent at the end of the fourth quarter of 2015, down from 16.4 percent at the end of the 2014. This decrease in vacancy represents approximately 57,000 square feet of positive absorption. We anticipate first quarter 2016 vacancies to further decrease and for this downward trend to continue throughout the rest of 2016.

We are currently seeing Class A properties in the best locations commanding rents above $2 per square foot fully serviced. We expect this trend of increasing rents to continue throughout 2016 and into 2017 as many of these upper tier properties are 85 percent or more occupied. Office rents in lower quality properties are also experiencing increases of 15 percent to 25 percent to the $1.65 to $1.85 per square foot full service levels as property owners find themselves on much stronger footing than previous years.

Tenant inducements such as free rent can still be negotiated albeit on lower levels than previously obtained by tenants over the past few years. The free rent is being used by landlords to help bridge the gap between expectations and provide lower “effective rents” to tenants while keeping the higher lease contract rates. In addition, turn-key tenant improvement packages are still prevalent in most lease transactions as many landlords are able to obtain better contractor pricing than tenants based on relationships.

The purchase market for owner/user office buildings has slowed slightly resulting more from a lack of supply than that of lower buyer demand, which remains strong. Interest rates continue to be at all-time lows and lenders are bullish on owner/user SBA financings. This low cost of funds is providing companies the ability to purchase and secure long term financing that often results in a lower cost to own a building than leasing it on a monthly cash basis and even more so when tax advantages of ownership are considered.

The Santa Rosa office leasing and purchase markets are definitely on the upswing and we recommend that tenants and buyers take advantage of locking in longer term leases or purchasing now as we anticipate higher rents, higher prices and lower vacancies over the next twelve to eighteen months.

Dave Peterson is a partner of Keegan & Coppin Co. Inc./ONCOR International.

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